Four Reasons Mexico Is the New China

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When it comes to global manufacturing, Mexico is quickly emerging as the "new" China.

According to corporate consultant AlixPartners, Mexico has leapfrogged China to be ranked as the cheapest country in the world for companies looking to manufacture products for the US market. India is now number two, followed by China, and then Brazil.

In fact, Mexico's cost advantages and have become so cheap that even Chinese companies are moving there to capitalize on the trade advantages that come from geographic proximity.

The influx of Chinese manufacturers began early in the decade, as China-based firms in the cellular telephone, television, textile, and automobile sectors began to establish maquiladora operations in Mexico. By 2005, there were 20 to 25 Chinese manufacturers operating in such Mexican states as Chihuahua, Tamaulipas, and Baja.

The investments were generally small, but the operations had managed to create nearly 4,000 jobs, Enrique Castro Septien, president of the Consejo Nacional de la Industria Maquiladora de Exportacion (CNIME), told the SourceMex news portal in a 2005 interview.

China's push into Mexico became more concentrated, with China-based automakers Zhongxing Automobile, First Automotive Works (in partnership with Mexican retail/media heavyweight Grupo Salinas), Geely Automobile Holdings (GELYF) and ChangAn Automobile Group (the Chinese partner of Ford (F) and Suzuki Motor), all announced plans to place automaking factories in Mexico.

Not all the plans would come to fruition. But Geely's plan called for a three-phase project that would ultimately involve a $270 million investment and have a total annual capacity of 300,000 vehicles. ChangAn wants to churn out 50,000 vehicles a year. Both companies are taking these steps with the ultimate goal of selling cars to US consumers.

Mexico's allure as a production site that can serve the US market isn't limited to China-based suitors. US companies are increasingly realizing that Mexico is a better option than China. Analysts are calling it "nearshoring" or "reverse globalization." But the reality is this: With wages on the rise in China, ongoing worries about whipsaw energy and commodity prices, and a dollar-yuan relationship that's destined to get much uglier before it has a chance of improving, manufacturers with an eye on the American market are increasingly realizing that Mexico trumps China in virtually every equation the producers run.

"China was like a recent graduate, hitting the job market for the first time and willing to work for next to nothing," Mexico-manufacturing consultant German Dominguez told the Christian Science Monitor in an interview last year. But now China is experiencing "the perfect storm … it's making Mexico -- a country that had been the ugly duckling when it came to costs -- look a lot better."

The real eye opener was a 2008 speculative frenzy that sent crude oil prices up to a record level in excess of $147 a barrel -- an escalation that caused shipping prices to soar. Suddenly, the labor cost advantage China enjoyed wasn't enough to overcome the costs of shipping finished goods thousands of miles from Asia to North America. And that reality kick-started the concept of "nearshoring," concluded an investment research report by Canadian investment bank CIBC World Markets (CM).

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